Oh my, oh my…this is getting interesting…

“How zombie consumers menace the world economy,” is a headline from Yale Professor Stephen Roach. Mr. Roach is misusing the word ‘zombie,’ but he’s coming closer to understanding what is really going on.

That is, he’s beginning to see things our way!

Greek 2-year debt was yielding over 30% on Friday. Everybody said the situation was dire. And everybody agreed that this time, the Greeks were not likely to get away without a default of some sort.

This is a great moment for the world’s intellectual and moral life. Suddenly, people are beginning to realize that you can’t make bad debt go away by piling more debt on top of it. And yes, when you make mistakes, you have to pay for them.

Perhaps this insight could be teased out into a broader, deeper understanding of how life actually works. Maybe it is true, after all, that you can’t create real wealth by printing up pieces of paper. And maybe it’s also true that economists working for central banks can’t do a better job of running an economy than they can of running an anthill. Maybe central planning doesn’t work after all?

And maybe there are some things you just should not do…such as spend too much money. Or murder people, even if you don’t like them. Or send photos of yourself in a ridiculous, obscene pose via the Internet.

Yes, dear reader, maybe there are some things that are right…and other things that are wrong – no matter how smart you are.

As Mr. Yanis Varoufakis, an economics professor at the University of Athens, explained to The International Herald Tribune:

“When you are insolvent you do not solve things with new and larger loans.”

In Europe, the very smart financial authorities kicked the can down the road. And now they’re tripping over the can.

In America, they kicked the can so far you can barely see it. And it’s the size of a 55-gallon drum.

Europe’s problem is sovereign debt – government debt – and bank debt. America’s problem is private debt now, government debt later.

Europe could fairly easily solve its problem. Greece doesn’t really matter to anyone – not even to the Greeks. It could be cut loose. Abandoned. Allowed to go broke, as we predicted it would a couple years ago.

The problem is that there is an ankle bone connected to the leg-bone…and the foot-bone is connected to the ankle bone. And without feet or legs, Europe can’t walk. The big banks – especially French banks – hold Greek debt. If the loans go bad in a big way, the banks will probably go broke too. That’s why Moody’s downgraded the banks last week.

The press says authorities are worried that one thing will lead to another…and pretty soon it will get out of hand. They say they’re afraid of a “Lehman moment.” But what they’re really frightened by is something that happened closer to home. It’s a ‘Creditanstalt moment’ they fear most.

Creditanstalt was an Austrian bank that went broke in 1931. Before it went under, most people had never heard of it. But after it couldn’t pay its bills it became infamous. The bank owed a lot of money to a lot of other banks…and then they couldn’t pay their bills either…then, the whole banking system went bust. The Great Depression resulted – in which nearly half of America’s 25,000 banks failed.

So, the authorities want to avoid a Great Depression. Very understandable. But what’s the plan? To kick the can farther? What do they do when they catch up to it again?

In the US meanwhile, it is consumer debt that is the immediate problem. There too the authorities booted it down the road as best they could. But in the New World as in the Old, there’s always something that goes wrong. You refinance Ireland…and Portugal needs cash. You give the Portuguese some money…and then the Greeks threaten to go belly-up.

In the US, the authorities refinanced the banks. The bankers got their usual bonuses – and more. But they couldn’t do much about consumers. The poor working stiffs were losing jobs, income, and housing wealth – all at the same time.

And now, with their lack of purchasing power, US consumers have the whole world economy at gun-point. “One false move…and you’re all dead!” More below:

America’s Greece may be California.

“California nearing fiscal crisis,” reports The Financial Times. Governor Jerry Brown vetoed a budget plan. He said it wouldn’t do the job. We didn’t see the plan, but our guess is that Brown is right. But this leaves the Golden State in a fix. It needs money. And like Greece, it can’t print its own.

So the fingers are pointing. And the hands are wringing. And everyone is worried…except us.

Here at The Daily Reckoning, we’ve learned to make catastrophe our friend. We open the door and look for it. We invite it over for drinks. If we knew how to send Twitter messages we’d send it one or two. Maybe with photos attached.

‘But if California can’t pass a budget the police won’t get paid…’ say the worriers.

So what? Private citizens have plenty of guns in California. The crime rate will probably go down.

‘But what about the teachers?’ Don’t make us laugh. Besides it’s summer. Time for a vacation.

‘What about people on welfare?’ Don’t expect us to cry for the zombies.

‘There must be something that the state does that is essential!’

Name one thing! Ha ha…

Actually, we don’t know what the state does that is helpful and what it does that is hurtful. All we know that it spends a lot of money. So, cut the money off…and we’ll see what we really miss.

Back on the national stage…the scene is set for another recession. Here’s The New York Times:

For those fretting that a string of disappointing US economic data presage a double dip in the recession, there is good news and bad news.

The good news: It would probably take a significant shock to knock the economy off course, even in its weakened state. The bad news: In the current environment there are plenty of potential shocks to worry about.

Yes, such as Greece. California. China. Housing. Inflation.

And those are just the shocks we know about.

The fact is, when Humpty Dumpty is sitting on a wall, there’s always someone around to give him a push.

Let’s define our terms. A ‘zombie’ is someone who lives on the flesh of living human beings. Like a senator. Or a conniving military contractor. Or a welfare chiseler. Or a bailed-out banker.

A consumer who has no money is hardly a ‘zombie.’ He’s only a zombie if he gets his money dishonestly – that is, through theft, fraud, or government.

Even gypsy beggars are not zombies. They provide a useful service; allowing people to feel better about themselves for tossing them a buck or two.

But Roach is right. The immediate problem in America is consumer debt. It went up since the end of WWII to 2007. Since then, it’s gone down. This is a big change. And it puts a strain on the whole consumer economy.

The US economy – as well as many foreign economies – is set up to anticipate more and more consumer spending. But US households haven’t been able to deliver.

“Growth in consumption has averaged 0.5% annualized,” write Roach. “Never before in the post WWII period has consumption growth been this weak for this long.”

Well, Stephen, it’s a Great Correction. What do you expect? Consumers are correcting 60 years of credit expansion.

In many ways, this is a worse problem than Europe’s sovereign debt crisis. In Europe, the problem could be solved by letting a few banks and speculators go broke. It would teach the rest of them a lesson. Most likely, Europe could get back to work soon after.

But America’s consumer debt problem will take many years to solve. Household debt is down to 115% of disposable income – down from 130% in 2007. But it averaged only about 75% from 1970 to 2000. Roach thinks it will take three to five years more to bring consumer debt down to more comfortable levels.

Bill Bonner is the President of Agora Publishing. For more on Bill Bonner, visit The Daily Reckoning.